Fitch Affirms Indonesia's PT Pertamina at 'BBB-'/Stable
Monday, June 15 2015 - 07:35 AM WIB
Equalised with Sovereign: Pertamina's ratings are equalised with those of its parent, the Republic of Indonesia (BBB-/Stable), reflecting strong legal, operating and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. The affirmation reflects Fitch's view that strong state support will continue due to Pertamina's position as one of the most important state-owned entities in executing Indonesia's national energy policy. Pertamina is the country's sole refiner and the dominant retailer of petroleum products. Its standalone credit profile is currently at the same level as its 'BBB-' rating. Pertamina's strong state linkages have helped it maintain adequate liquidity via good access to bank financing and debt markets, and Fitch expects this to continue.
Public Service Obligation: Pertamina performs a government directed public service obligation (PSO) by selling certain refined products at prices set by the state, which are below market prices. Pertamina in turn is compensated through a government subsidy, which ensures it receives a predetermined margin above the international benchmark prices on the products sold under the PSO. These subsidies are important for Pertamina to operate as a profitable entity. Pertamina received subsidies of USD17.8bn in 2014, compared with EBITDA of USD6.1bn.
Reduction in Subsidies: Fitch expects the total subsidy payment to Pertamina to fall substantially to USD3bn-4bn in 2015, following the removal of subsidies on gasoline in January 2015. Most of the diesel and LPG, and all kerosene sold in Indonesia are still retailed at below-market prices. As long as Pertamina continues with the PSO, the subsidy reimbursement would be necessary for the company to operate as a profitable entity. The transition to a market-linked mechanism for gasoline prices has been aided by lower international fuel prices. Fitch estimates that gasoline accounted for more than 40% of the total subsidy Pertamina received in 2014.
Weakening Credit Metrics: Fitch believes that Pertamina's FFO net leverage to could increase by up to 5.5x through to 2017 (3.44x in 2014), due to weak international oil prices and high capex. Pertamina is directly affected by weak oil prices because Pertamina's upstream operations accounted for about 90% of EBITDA in 2014. The majority of its own crude oil output is sold to its refineries and Pertamina's downstream revenues, including the subsidies, broadly vary in line with movements of international fuel prices. Pertamina's credit metrics are likely to gradually improve after 2016, reflecting Fitch expectation of improving oil prices and an increase in Pertamina's upstream production driven by its investments.
Increasing Capex and Investments: Pertamina's capex and investment budget between 2015 to 2019 is about USD35bn, including an allocation of about USD8bn for acquisition of upstream assets. Fitch estimates that Pertamina externally sources over 75% of its refinery crude requirement and over 40% of refined products sold. Increasing Pertamina's upstream production and refinery capacity remains important to improving the company's profitability and containing the state's potential subsidy expenses.
Standalone Profile: Pertamina's standalone credit strength reflects its vertically integrated operations, large scale and dominant position in Indonesia's retail fuel market. However, its operating strengths are moderated by its short upstream production position, mid-stream capacity relative to its overall petroleum product sales, and deterioration in its credit metrics. Pertamina is one of Indonesia's largest producers of crude oil, accounting for over 20% of the country's crude output. Overall, Fitch considers Pertamina's standalone credit profile to be a weak 'BBB'. (ends)